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The chart you must pay attention to if you’re buying a home or renewing a mortgage

If the mortgage-rate outlook was a weather forecast, you’d see gathering clouds and rain.

For now, the sun is done. Borrowing costs on the hugely popular five-year fixed-rate mortgage have been creeping higher since the year began, and pressure for more increases is building. You can see it happening in this chart showing the return, or yield, on the five-year bonds the Government of Canada issues to finance its operations.



Bond yields rise when financial markets start worrying about inflation. Here’s why you should care about this: Five-year bond yields are a key factor used by banks and other lenders in setting five-year fixed-rate mortgages. Sustained increases in these yields will be passed along to home buyers and owners.

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Here are some thoughts on what to do now if you’re buying a home or renewing a mortgage in the months ahead from veteran mortgage broker David Larock:

Consider the variable-rate mortgage: On Mr. Larock’s advice, about 90 per cent of his clients who chose a five-year term on their mortgage in the past couple of years went with a fixed rate. In the past week or so, Mr. Larock pivoted and started to talk up variable rates. “Variable rates are going down and fixed rates are going up,” he said. “Right now, you’re looking at almost a percentage point between your best variable and your best five-year fixed rate.” Mr. Larock has seen it all in the mortgage market, yet he’s still surprised at the ferocious competition between banks on variable-rate mortgages today.

Mind the risk of a fixed-rate mortgage: People think variable-rate mortgages are the more dangerous choice because costs go up every time the Bank of Canada boosts its trendsetting overnight rate. There are five more rate settings in 2018, which means plenty of opportunity for rising rates to be felt by people with variable-rate mortgages. Fixed-rate mortgages do protect you against these increases, but what if bond yields peak and then start falling? “If your timing happens to coincide with a point where the bond market is overshooting, as I think it is, then you will have locked in at a peak,” Mr. Larock said. “If rates come back down, you’re stuck for five years.”

Shorter-term fixed-rate mortgages are no help: Mr. Larock said the savings over the five-year rate don’t offer enough compensation for the reduced security you get when you choose a mortgage with a shorter term.

Don’t wait until the last minute to renew a mortgage: Lenders will often hold a rate for you for 120 days, or 90 days in some cases. Caveat: Mr. Larock said some lenders may require you to immediately start your new mortgage term. “In many cases, the current mortgage has a better rate than the new mortgage. They’re saying, ‘You have to give us four months of your 2.6-per-cent fixed mortgage and take a 3.4-per-cent fixed.’ ”

Get a preapproved rate if you’re even just idly thinking of buying: Preapproved rates aren’t your lender’s best deal, Mr. Larock says. But they at least give you a cap on what you’d pay if you buy in the next 120 days. “What I say to borrowers is, the preapproval rate is your fail-safe. If there are better rates available when the deal goes live, we’ll tear [your preapproval] up and get you a better rate.”

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